Loans

The Ultimate Guide to Student Loans

The figure is staggering: Americans owe $1.1 trillion in student loan debt, which is second only to mortgages in terms of household debt. The Consumer Financial Protection Bureau recently released a report detailing the hardships facing some of those borrowers, warning about a “domino effect” on the economy.

The average balance is more than $26,000 for someone with student debt, and one in eight borrowers owe more than $50,000, according to the CFPB. And some debtors are struggling to repay huge debts, such as the person who told us about his struggle to pay back more than $150,000 in student loans despite a good job.

Student Loans & Credit

Student loans generally help your credit scores, as long as you pay them on time. That’s generally true, even if you owe fairly large balances. Surprisingly, even loans in deferment, forebearance or being paid through IBR are generally not reported negatively or considered negative by most credit scoring models. A few borrowers who never missed a payment have complained, however, that the way they are reported (with multiple accounts listed for the same loan) caused their credit scores to drop.

Of course if you are late on payments on one of these loans, your credit scores will suffer. And parents, grandparents or others will also likely find their credit scores hurt if the student they co-signed for pays late or defaults, or if they find they can’t keep up with parent loans they took out themselves to finance their children or grandchildren’s educations.

But keep in mind, even when payments are made on time, many lenders look at debt ratios in addition to credit scores. In other words, they want to know if the borrower can handle the payments on the new loan in addition to their current debts. From that perspective, school loans can keep young people (and plenty of older ones, too), from buying a car or even from buying a home.

Good Debt? It’s Still Debt

Even though these loans are generally considered “good debt” because they can help those with a degree to increase their earning power, a significant portion of those who took them out don’t graduate, find themselves with more debt than they can manage, or aren’t able to find jobs that allow them to repay their loans. As a result, student loan defaults are skyrocketing.

For those who become disabled and cannot work, new rules will make it easier for them to discharge their debt due to disability. That’s the good news. The bad news is that a discharge will likely trigger a 1099-C for the canceled debt. That means the amount forgiven is reported as income, and unless the borrower qualifies for the insolvency exclusion, they may find they have a new debt — this time to the IRS. At a minimum, the confusion over the paperwork required to claim this exclusion may require the help of a tax professional and cause considerable stress.

It’s extremely difficult to discharge student debt in bankruptcy, though that doesn’t mean that at least a few people might try to find loopholes they can use to get around that roadblock.

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How to Dig Out of Student Loan Debt

Digging out from under student loan debt can feel as daunting as facing that first year of college. Just trying to figure out how much you owe — and to whom you owe it — can be tough, both for some recent graduates, as well as those who have tried to ignore their debt for a while. The federal National Student Loan Data System (NSLDS) is a good place to start, as most federal loans will be included in that database. Try to get a handle on the big picture so you can develop a game plan for tackling your debt.

One of your first tasks should be to find out whether you qualify for loan forgiveness programs. Those programs are limited, but if you do qualify, you may get some or all of your debt forgiven, and unlike the disability discharge, you may not have to pay taxes on the forgiven amount, depending on the program.

If, on the other hand, you are having trouble keeping up with your payments, then you’ll first want to know your rights, which include the right to counseling, information from the loan servicer, deferment and reduced payments. Forbearance or deferment may help you temporarily reduce or suspend your payments, but for a longer term solution, check out IBR. The Income-Based Repayment and Pay As You Earn programs allow those with federal student loans to reduce their payments based on their income, if they qualify. Payments can go as low as $0 a month for someone who is not working. Balances are forgiven after 10, 20, or 25 years in the program. (The length of time varies by program and depending on whether or not employment is considered public service.)

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Intelliloan

This is a great guide, you really put in the time. Student loans can really set people back when it comes to their financial future. I agree it is very important to know your rights.

Mike Chevier

Thats a great plan if all that student loan debt is a federal student loan debt. If its from a private agency / bank / lender then your out of luck like we are until we either pay it off which is not likely to happen any time soon.

Student loans are just one more racket on how the government will control you. They hand them out like candy and then you get screwed when it is time to pay for them and do not believe that they work with you because THEY DO NOT…..they will take your first born if they could–they are evil and for all the attention and print that Student loans are getting these days do you see Obama say a word about them….no he is telling people that all people can go to college……yeah….how…..they can hardly live and in todays world you never know what is around the corner….we aRE ALL CONTROLLED BY INVISIBLE FORCES AND THIS IS JUST A CLASSIC EXAMPLE OF THEM…

Cynthia Vornberger

Every single article that is printed on student loans says the same thing over and over again….with no resolution. I do not have student loans but my son does and I pay some of his just like I did for my daughter…..one of his happens to be a private loan with a high interest rate and ridiculous payments…..the bottom line is….if you do not make the money there is no way that you can give them what they way and they have the ultimate control….anyway you look at it be forewarned do not get a student loan……there is nothing good about any of it..

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